Fast-food stocks are not to everyone’s Taste: here’s why
Since peaking in July 2015, the Taste Holdings share price has fallen 97%. Blame Starbucks and Domino's
Only a few years ago fast-food stocks were flavour of the month on the JSE. The economy was growing relatively strongly, new brands were being introduced to SA and share prices were riding high. Fast forward to the current situation where most of them are taking a real beating and at least one of them may not exist on the JSE board in future.
The main listed operators are Famous Brands, Grand Parade Investments (GPI), Spur Corporation and Taste Holdings. Since peaking at 470c in July 2015, the Taste share price has lost 97% of its value and is now trading at 14c. The main reasons for this stunning fall from grace are the languishing SA economy coupled with some poor expansion decisions.
Taking a closer look at Taste, its precipitous decline is largely the result of an overly ambitious expansion programme, notably via the purchase of Domino’s Pizza and Starbucks franchises. Prior to these acquisitions, Taste was bumbling along quite nicely with an incongruous mix of fast food and jewellery franchises, such as Maxi’s, Scooters, jeweller NWJ and Arthur Kaplan, the Fish & Chip shop and others.
New controlling shareholder the Riskowitz Value Fund (RVF) appears to be intent on continuing with the rollout of Starbucks and Domino’s outlets, regardless of the poor state of the economy. It’s a brave move. Starbucks’ super-premium pricing in a highly competitive local coffee market makes the task even more daunting.
Analyst Anthony Clark of Small Talk Daily Research says: “For the past four years Taste simply took on too much too quickly, without realising the implementation costs in terms of time, money and brand dynamics.”
He believes that converting its existing pizza brands (St Elmo’s, Scooters) to Domino’s (a pretty unknown brand to many in SA) was always going to be flawed.
“And the further change in model to own more corporate stores rather than franchises also had inherent detrimental aspects such as more working capital for head office, lower margins, and consuming time.”
Clark is critical of Taste’s adoption of Starbucks as a corporate owned business.
“The cost of securing and fitting out the site was hellishly expensive in what would be a ‘destination location’, in contrast to the usual coffee culture in SA which is pretty much grab and go from such outlets.” He questions whether Starbucks SA wants to be a café or a takeout coffee joint. He also notes that any expansion is difficult: “The market is competitive, their prices are premium as all their stuff is imported, and they want to be in high traffic areas.”
Looking at Taste’s rights issue details, Clark comments: “It is damning that they will need 150 to 200 Starbucks and 220 to 260 Domino’s as well as another R568m (after the current R132m rights issue at 10c) JUST to be cash neutral!”
Although vehemently denied by management, one can’t help thinking that the end game with Taste will be a buyout of minorities at an even lower price than the current one, followed by a delisting.
Clark concurs: “That’s my prognosis. With RVF owning 66% currently, it would be mad for minorities to follow at 10c. I can see RVF owning 90% of TAS and thus forcing a cheap buy-out. Keeping TAS listed keeps the mess in the public eye and RVF’s US investors must be riled they have pumped hundreds of millions of rands into Taste and seen nothing but massive capital losses.”
Taste’s demise is sad. Who can forget the early days when everything was going smoothly, and former CEO Carlo Gonzaga confounded the sceptics by incorporating the non-fast-food element of jewellery. This is surely a salutary lesson in not betting the farm on grandiose projects.